The liberty alarm is ringing, and the establishment is telling us to hit the snooze button.

Sunday, July 11, 2010

Has the Gold Rush Even Started?

Today I came across this article on Businessweek that claims we may be in the midst of a "modern day gold rush."

As evidence of this supposed gold rush, the article mentions various people that have taken up the hobby of gold prospecting, or "recreational mining," and have joined groups centered around the activity. The piece also mentions a few companies that are rolling out plans to sell gold-for-cash and cash-for-gold vending machines in locations such as upscale hotels, airports, and casinos. Yet more evidence offered in the article to support the idea of a sizzling-hot gold market is the recent business growth experienced by companies that insure physical precious metal holdings (e.g., in safe deposit boxes or home safes), as well as recently rising sales by safe makers.

Admittedly, those are all good signs that the gold market and its related businesses are indeed doing quite well. From a certain myopic perspective, I can even understand why some people would think the gold market is in the midst of a bubble. After all, everyday people taking up "recreational mining" as a hobby sounds disturbingly reminiscent of the everyday people who became day-traders during the dot-com bubble and the everyday people who became part-time or even full-time real estate agents during the housing bubble. To paraphrase Doug French, president of the Ludwig von Mises Institute, from his April 2009 lecture "Bubble Economics": A speculative bubble has officially peaked when strippers start giving investment tips.

But the fact that some people happen to be prospecting for gold in their spare time doesn't mean much by itself. The real question is how many people are prospecting for gold in their spare time. To give you some perspective, at the peak of the housing boom several years ago, close to one out of every 100 people in Las Vegas was working as a real estate agent. With that many people participating in the speculative mania, it was virtually impossible not to have at least a couple of friends or family members who were working in real estate. It was a similar story during the dot-com bubble, when just about everybody seemed to be dispensing stock tips and was planning to start their own Internet companies and make millions practically overnight by "going public." It was absolute insanity both times.

This supposed "gold rush" is nothing like that--not yet, anyways. Not even close. How do I know this? Because nobody owns gold yet. Sure, a lot of Austro-libertarians and gold bugs own some gold, and a lot of those people own quite a bit of gold, but that's a drop in the bucket. It's miniscule. To speak in terms of a speculative mania is to speak in terms of entire financial markets, entire economies, entire populations... millions of people.

The average investor does not own any gold. If you doubt this, just start taking a random sampling of the people you talk to on a day-to-day basis. Find a way to work the topic of investing into the conversation. Ask them where they buy their gold, and most of them will give you a strange look--because they don't own any. When you see the occasional TV or magazine ad relating to gold, note that they are usually informing you how to sell your gold to them (cash for gold jewelry and scrap gold, etc.). Those businesses aren't run by dummies. Their financial aim is to buy low and sell high. The reason they want you to sell your gold to them right now is because its price is cheap, and they want to buy it cheap. They know that soon the price is going to rise--and rise, and rise--and when it rises high enough, the TV and magazine ads you see will be informing you how to buy gold from the same businesses that bought it from you on the cheap. But at that point, you'll have to pay top dollar for it.

When will we know a gold bubble has actually formed and is ready to burst? I'm not exactly sure, but I suspect we'll know it when our doctors, dentists, hairdressers, and Starbucks baristas are all offering gold stock tips and starting to quit their jobs to become full-time gold prospectors. Until then, I'm going to keep buying gold and silver. It's dirt cheap.